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Value at Risk, Legislative Framework, Crises, and Procyclicality: what goes wrong?

Author

Listed:
  • Evangelos Vasileiou

    (University of the Aegean)

  • Aristeidis Samitas

    (Zayed University College of Business)

Abstract

"This study highlights some deficiencies of the stock markets’ risk legislation framework, and particularly the CESR (2010) guidelines. We show that the current legislative framework fails to offer incentives to financial management companies to invest in advanced models for more representative Value at Risk (VaR) estimations, and for this reason, in many cases conventional VaR models are applied. We use data from the DAX, CAC 40, FTSE, FTSEMIB and IBEX indices, and then we apply them to the widely accepted Delta Normal VaR model. The empirical findings show that the conventional VaR models not only fail to provide information for the upcoming financial crises, but also contribute to such phenomena as procyclicality and overreaction in the stock market. We suggest additional tests and we empirically show how these tests could reduce the procyclicality issue and promote a more sustainable investment environment. Even though this study is mainly focused on CESR (2010) guidelines, it could be useful for any similar legislative framework, such as the Basel Accords."

Suggested Citation

  • Evangelos Vasileiou & Aristeidis Samitas, 2020. "Value at Risk, Legislative Framework, Crises, and Procyclicality: what goes wrong?," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 12(3), pages 345-369, October.
    • Handle: RePEc:ren:journl:v:12:y:2020:i:3:p:345-369
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    Cited by:

    1. Evangelos Vasileiou, 2022. "Inaccurate Value at Risk Estimations: Bad Modeling or Inappropriate Data?," Computational Economics, Springer;Society for Computational Economics, vol. 59(3), pages 1155-1171, March.

    More about this item

    Keywords

    Financial regulation; Value at Risk; Procyclicality;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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